Emerging market debt: myth versus market reality

Meanwhile, the Federal Reserve is cutting interest rates, and growth expectations for EMs versus developed markets (DMs) are widening. This should be positive for EM assets. 

For some investors, there is still a perception that EMD is an inherently risky asset class, with less attractive returns. So let’s look at returns in 2025 and compare those in EMs with those in DMs.

EMs significantly outperformed in 2025 (see charts one and two). The good news is that we expect yields in EMs to keep outperforming DMs.

Hard-currency sovereigns: momentum building

Even though yields in emerging market hard-currency bonds have tightened, they still offer more income than US high-yield (HY) bonds. Crucially, many emerging market governments have regained access to global debt markets, and investors from across the credit spectrum are showing renewed interest.

That combination has helped boost demand and support recent performance. We expect this positive trend to continue in 2026.Frontier markets are showing real promise. Many have emerged stronger from the turbulence of the pandemic.

From Ghana’s gold-driven recovery to Egypt’s reform progress, government spending has improved, foreign exchange reserves are healthier, and debt profiles are more sustainable. Few frontier economies record large trade surpluses with the US, which means that returns are driven more by their domestic conditions. Yields on frontier bonds at an index level remain at an attractive 9.1% [1].

EM hard currency corporate debt: steady as she goes 

On the corporate side, fundamentals are robust. At an index level, the asset class boasts an average investment-grade rating. Demand for EM corporate debt is currently outpacing supply, which has translated into solid returns for investors. In recent years, EM corporate behaviour has not transitioned towards an aggressive stance. This is reflected in debt levels which are at their lowest point since 2008 and remain below that of European and US counterparts. 

When investing in EM corporates, we prefer to hold companies that are operating in a country with a HY rating. These companies often have stronger balance sheets than those in DMs. Investors are compensated with a higher yield, but they’re investing in companies with better underlying fundamentals. 

At an index level, yields in EM corporate debt have been falling and are now just below 6% [1]. But valuations in the HY market look compelling compared with DMs – EM corporate HY currently has a yield of 7.5% versus 7% for US HY4. 

EM local-currency debt: more upside to come

Despite some recent depreciation, the US dollar remains expensive, which means yields in EM local markets are attractive. This environment offers retail investors the potential for both income and currency appreciation – a combination that is relatively rare in today’s markets. 

Within the widely followed JP Morgan EM Local Currency Index, we forecast that eight to 10 of the central banks will remain in rate-cutting mode in 2026. There is also scope for cuts in frontier countries, especially where central banks have delivered large rate hikes to fight inflation and where rates are now very high (Nigeria, Ghana, Egypt and Kazakhstan). We remain in yield-seeking mode in our local currency portfolios. We are underweight in low-yielding countries in Asia and overweight in higher-yielding ones in Latin America, Europe, the Middle East and Africa.

Final thoughts…

EMD offers investors diversification, an attractive income, and exposure to faster-growing economies. After a very strong 2025, yields remain compelling relative to DM bonds. For retail investors looking for income and diversification beyond traditional global bonds, EMD offers a compelling opportunity.